Challenging Data on States' Finances

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Wednesday, August 25, 2021  / 12:58 PM / by FBNQuest Research / Header Image Credit: FBNQuest

                                                                                                                                                                                  

Today's chart shows a trend increase in the revenue and spending of state governments from mid-2016 through to end-2019. For the two subsequent quarters (the series only runs to Q2 '20), we see a steep decline, which coincides with the emergence of the COVID-19 pandemic and the very sharp fall in the crude oil price (since reversed). We might think that the trend follows that of monthly distributions by the Federation Account Allocation Committee (FAAC), which supplies the vast majority of revenue for most states. However, those payouts rose sharply in 2018 and fell gently the following year: in contrast, states' spending rose at a decent rate in both years. Our explanation is that their spending is overwhelmingly non-discretionary, led by salaries.

 

We noted yesterday the ruling by the Federal High Court in Port Harcourt in favour of the collection of VAT by state governments rather than by the Federal Inland Revenue Service (FIRS).  We do not stray into contentious political territory, as our readers well know, yet two points are worth making. First, import VAT on international trade, which accounted for 23% of the total last year, is collected by the customs service (not FIRS).

 

Second, if the ruling is upheld, the FGN will surely have to make some fiscal adjustment in favour of the large number of states which generate little VAT and little internal revenue generally because of the modest level of taxable economic activity within their borders. Other than periods of soaring oil prices and revenue, and payouts by the FAAC, it is difficult to see such states as fiscally viable. The UK Treasury, for example, has adjusted public spending in favour of the 'devolved administrations' (Northern Ireland, Scotland and Wales) on the basis of the Barnett formula since the 1970s.

 

The CBN draws its data from the federal finance ministry, the office of the accountant general of the federation, and its own survey of state and local governments. The third element may be the origin of some large differences with the series on state government finances presented by the National Bureau of Statistics on the basis of its own survey.

 

The CBN's aggregate data for the third tier, the 774 local governments, are drawn from the same three sources. The compilation of the data, we suspect, is still more challenging. We find very small deficits for 2015 through to 2107 and small surpluses for the two subsequent years. The correlation with the total FAAC distributions is closer than that of the states, evident, for example, in the sharp increase in 2018.

 

Aggregate state government finances (NGN bn)

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PPT and Royaltiess

Sources: Local media; FBNQuest Capital Research


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